Is Disney’s Withdrawal a Sign of Netflix in Trouble?

Netflix has been making headlines the last couple of weeks and not all of them have been good. While the purchase of comics publishing firm Millarworld was Netflix’s first company acquisition, reports have come out that Netflix also has acquired $20.54 billion in long and short-term debt.

That’s billion. Not million.

On top of that, Disney announced that they would be launching their own streaming service and breaking away from Netflix. The details are still being worked out.

Let’s start with the $20 billion. According to the Los Angeles Times, Netflix has paid out an unprecedented amount of cash to produce new shows in order to bring in subscribers and compete with Amazon, Hulu, and HBO. Netflix has over 104 million subscribers and their goal is to reach a point where 50% of their streaming offering is original content that they own so they can generate more future revenue. This year they will be spending close to $6 billion on original content alone.

Shouldn’t they be worried about their growing debt that was reported in the Los Angeles Times?

Turns out, it’s not as bad as it appears. Netflix responded to the story:

“The L.A. Times story inaccurately calculates our debt, counting our streaming obligations (i.e. our content contracts with studios) of $15.7b as debt, which it isn’t. The correct number: we have total gross debt of $4.8b vs. our equity market value of about $75b. They have since corrected the story.

“More context, the $15.7b is future content expenses that roll through the income statement over time. Every broadcaster, cable network and streamer that has licensing agreements uses the same structure. As a point of reference, Disney/ESPN has $49b in similar commitments for sports contracts.”

So Netflix is really about $4.8 billion in gross debt, and the $15.7 billion is money owed to studios via contracts, which is separate.

What about Disney?

Disney made waves when it said they would be pulling their titles off Netflix and ending their deal to start their own streaming service in 2019. This would be a huge blow to Netflix and make a dent in subscriptions as parents would most likely choose to subscribe to Disney.

To be clear, Marvel Television/Netflix shows like Jessica Jones, Luke Cage, Daredevil, Iron Fist and The Defenders will stay, as they are a separate deal.

Netflix has remained in “active discussions” with Disney about a deal for Lucasfilm and Marvel titles after the companies’ current movie-output deal expires in 2019, chief content officer Ted Sarandos said in an interview with Reuters.

Sarandos told Reuters that Disney’s streaming service was a “natural evolution” for media companies and added, “That’s why we got into the originals business five years ago, anticipating [negotiations to license content] may be not as easy a conversation with studios and networks.”

It’s a growing period for Netflix, as shares dropped after the Disney announcement; after hitting record highs last month, Netflix’s stock has dropped 7% since Monday.

While Disney’s announcement wasn’t the best of news, it does leave room for opportunity and it looks like Netflix is working hard to keep some sort of partnership. The Millarworld purchase is an intriguing step in the right direction.

Netflix has changed the Hollywood landscape and how people get their entertainment. Expect a couple more surprises in the near future to get a gauge on Netflix’s future.

What are your thoughts on Disney’s announcement and how it will impact Netflix?